Term Sheet

Term sheets are especially common in venture capital and private equity investments, but they are also used in loans, acquisitions and other deals. They summarise the key points the parties have agreed in principle, before lawyers draft the detailed contracts.

In a start-up funding round, a term sheet typically covers the amount being invested, the company's valuation, the type of shares being issued, liquidation preferences, board seats, voting rights, protections against dilution, rights to invest in future rounds and conditions that must be met before the deal closes.

For example, a venture capital firm might send a start-up a term sheet offering to invest 5 million at a pre-money valuation of 20 million, with one board seat and a 1x liquidation preference.

Most terms in a term sheet are not legally binding, although certain clauses, such as confidentiality and exclusivity, which prevents the company from negotiating with other investors for a period, often are. Founders should review term sheets carefully, often with legal advice, because terms beyond the headline valuation can significantly affect their control and eventual returns.